Expert Column Stories behind Skyrocketing ocean·air freight charges you wouldn't have known

The skyrocketing price of shipping goods across the globe may hit your pocketbook sooner than you think -- from that cup of coffee you get each morning to the toys you may want to buy for your kids.

- Bloomberg -

Transporting a 40-foot steel container of cargo by sea from Shanghai to Rotterdam now costs a record $10,522, a whopping 547% higher than the seasonal average over the last five years.

- Drewry Shipping, a British maritime consultancy -

I. Introduction : Changing Tide While the socioeconomic keywords since 2020 are pandemic and intact because of COVID-19, the hot issues in the logistics industry are collapse of the global supply chain and skyrocketing international shipping charge.

The pandemic situation and skyrocketing shipping cost, which are the reasons of a consumption recession, usually tend to be in a trade-off relation. However, difficulties in transportation because of skyrocketing charges and lack of shipping space are occurring now. Hence, nobody considers the current situation as the arrival of a super-cycle (long-term rise in price for 20 years or longer). Frankly speaking, it is not easy to suggest a measure against the increasing ocean and air freight charges after COVID-19.

If we, nevertheless, analyze the current situation of skyrocketing ocean and air freight charges and its fundamental reason and consider alternatives to maintain a stable global supply chain as a preparation against the future and unexpected crisis in a practical level, what approach can we make?
II. Skyrocketing Ocean and Air Freight Charges and Its Fundamental Reason : Bottleneck Effect Traditionally, the ocean transportation market is explained by 10 variables of a market model based on the economic cycle and supply and demand fluctuation.2) However, the economic cycle theory is considered to be not useful anymore because of the long depression in the ocean transportation market since the Subprime Mortgage Crisis (the Great Recession) in 2009. Hence, I will analyze the skyrocketing freight charges based on the supply and demand hereinafter.

First, if we see the demand change, although we expected a sharp decrease in demand because of the pandemic, the actual annual demand change in 2020 and 2021 reindicated net increase by -1.0% and 10.1%, respectively. There has been constant increase in the transportation volume since the third quarter of 2020 after the minus in the second quarter of the same year, and the supply in the same period indicated the same quarterly pattern. In particular, supply volume to Europe and America in August of this year increased by 30.5% and 55.9%, respectively, compared to May of the last year, and this indicates that all available vessels are in use for transportation. Considering this supply and demand status, we can call this skyrocketing freight charge an actual abnormality.

Then, what would be the fundamental reason of these skyrocketing freight charge and lack of space?

In general, results of expert analysis evaluates that those are circumstances of unusual events like rapid increase of demands, lack of container equipment, lack of trucks for inland transportation, shut down of terminals and Suez Canal blockage incident.
However, it is hard to accept quarterly freight charge increase over 30% considering that the demand increase is not greater than the supply increase.

If we read the supply and demand material considering such freight charge change, we can find the bottleneck phenomenon and reduction in the actual shipping volume because of degenerated on-time rate.

When ports around the world, which had been closed since March 2020, became open in the last June, demands has increased to supplement the inventory. Although the supply worth approximately 2.7 million TEU (11% of the entire supply) was out of operation and started to operate in accordance with the increase in the transportation volume, the restoration was made in steps for 2-3 months, considering that a vessel is input weekly per transportation line.

In other words, ‘bottleneck phenomenon’ occurred and was maintained as cargos were congested because the supply could not follow the increasing demand, and this led to the delay in the transportation.

In addition to this bottleneck phenomenon, terminal shut down and delay in work also deteriorate the smooth operation of vessels. This deteriorated the on-time rate to 30% level. As vessels became inoperative even when they are actually sailing, the situation mentioned above became even more serious. The Suez blockage incident also provided the reason for delayed sailing.

When congestion of ocean freight occurs, it is usual to transport urgent cargos by air, but the recent pandemic caused flight cancellations, and this led to the cargo congestion. It would be reasonable to think that the cargo congestion and skyrocketing freight charge occurred in the air transportation too because of lack of space compared to the cargo volume because assistance from passenger planes that supported some portions of the air freight transportation was not provided as operations of passenger planes were not normalized even until now.
III. Future Alternatives : Diversification of Transportation, Trust Building, and Enhancing Negotiatory Capability between Partners If we point out bottleneck phenomenon and deteriorated on-time rate mentioned before as the fundamental reasons, it seems there would be no proper alternative other than waiting until the problem we are facing is solved. We shall wait until the transportation to be normalized in steps after the Christmas demand is settled during the winter season.

However, if we think about possible solutions in terms of preventing similar future situation, we may suggest the following alternatives..

The first is reconsideration upon the transportation portfolio strategy. That is, designating the main carrier and one or two auxiliary carriers for strategic operation and building the mutual trust, rather than using too many carriers competitively, can be more helpful for the stable supply chain management.

The second is maintaining the balance between the logistics cost and trust building. Considering that exploiting the large-scale cargo as a pressure to lower the freight charge became an unfavorable factor in this kind of circumstance, efforts to build a win-win relation in which the customer acknowledges a proper level of freight fee to guarantee the profit of the carrier and the carrier provides proper space and services are required.

Third, efforts to create an umbrella under which small and medium shipper can enjoy fair freight charge and space are required. For example, methods like establishing an organization, such as the council for small and medium shippers, collective freight charge negotiation, and utilizing the negotiatory capability of the digital platforms by actively using them are possible.

In particular, platforms can eliminate the marginal cost. Contributing to the sound ecosystem while supporting an appropriate margin of the seller, rather than pursuing more profit by reducing the freight charge based on the transaction volume, can be the best alternative.
IV. Conclusion : Co-prosperity Comes from the Consideration No expert evaluates the recent skyrocketing ocean and air freight charge as the arrival of the super-cycle, and it is usually deemed to be a temporary situation. However, when its duration is exceeding a year at this moment, suffering of the actual shippers who bear limitation on export and import and threat on their business sustainability are at stake.

Considering these, the carrier shall consider long-term relations rather than monetization. The shipper company shall overcome this hard period wisely with the guarantee that they will establish a long trust relationship with the carrier that helped them even after the current situation is solved.

References [1] Characteristics of shipping market cycles, Martin Stopford, Maritime Economics, p.119-165. 2015.09.21
[2] Demand-Supply Variable, Martin Stopford, Maritime Economics, p.168. 2015.09.21

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